Monday, September 26, 2016

Early Retirement, and Where Our Property Taxes Go

Last week we got our property tax bill. And just like every year, I was strangely excited to open it. I know this means I'm an odd duck, but there's a part of me that likes seeing how my tax dollars support the local government. It makes me feel connected to my city.

Plus, there's the fact that our property taxes benefit from a cap: they can only increase 5% each year no matter what happens to property values. But there's no limit on how much they can fall. So when we purchased our home in 2010, our property tax bill was a preposterously low $872. They continued to fall each year until 2013, hitting a low of $762, as the assessments seemed to lag behind the property value trends. Then, as property values in Arizona fully recovered, our tax bills only increased 5% each year. So, somehow, our taxes are lower now than they were at the depth of the real estate crisis of 2009 and 2010, even though our home is worth double what it was back then. Ain't local government grand?

So I decided to dust off an old post from 2013, and break down where our property taxes go now in 2016. (Descriptions are liberally self-plagiarized from the 2013 post.)

School Districts

Scottsdale Unified District: $308. By far the largest portion of our our property tax goes to educate our city's youth. Having no children yet, I suppose I could view this negatively. But, hey, it's still a good feeling to know that the lion's share of our taxes are going to pay teachers, maintain schools, and, sure, educate the neighborhood kids.

Community College District: $113. Now we're talking. I love me some community college, and not just because of the excellent show on NBC. I can study anything from Economics to Equine Science at SCC, all for a ridiculous $86 per credit.

Tax Districts

County Primary Tax: $151. These funds are used to run the county government, including courts and jails.State Equalization Tax: $54. This tax is used to run state government, including the education department.City of Scottsdale: $55. These go into the city's general fund, to pay general expenses for police, fire, parks, libraries, etc. This is easily my favorite tax, as I use these amenities the most often.State Aid Credit: [-$144]. Apparently the three items above are just too much for the average homeowner to pay, so instead of paying a total of $260, we only have to pay $116. Thanks, state legislators!

Secondary Tax Amounts

Flood control: $19. These nineteen dollars go towards the maintenance of local damns and conduits.Central Arizona Water Conservation: $15. This is a particularly important issue in our state; it seems like money well spent.Fire: $1. One flipping dollar. Maybe the most curiously low amount on the entire list, this dollar goes towards county firefighting that's above and beyond that provided by the city.Library: $6. Just as with the fire tax above, this library tax is assessed county wide and fund libraries in adjacent cities that I can borrow from (Tempe, Phoenix, Mesa).Healthcare: $33. This money funds the county hospital, as voters chose to keep it open. Sounds like a good deal to me.Unified School Overrides: $42. A special tax was voted in by citizens, to both update schools and build new schools.Various Bonds: $156. This amount covers City Bonds ($67), Unified School Bonds ($66), and Community College Bonds ($25). These also are voted on by citizens; if an override doesn't pass then bonds can be used to continue the work originally intended to be covered by an override. (Note, I don't really understand what this means, but apparently we chose this tax, so that's nice.)East Valley Institute of Tech: $5. I didn't even know this school existed, but when I look at their website, I feel really glad that it does exist. Cool stuff for the kids in the valley who now might be better prepared for jobs in IT fields.

Total Annual Property Tax Bill: $837.

As always, the lesson seems to be one of gratitude. We live in a city that we love, with great public services like a free trolley, a greenbelt in walking distance with a bike trail that stretches on for miles, and a beautiful public library. At about eight hundred bucks a year, I'm amazed at how good a deal this is.

Still, there's no getting around the fact that, ultimately, you kind of get what you pay for in public services. It's not like our local Arizona governments are making this happen via some sort of unique efficiency or accounting magic: they're just not getting too many of their dollars from property taxes. Instead, we have a state income tax and a fairly high sales tax.

Turning this to an action item, the different ways that local governments choose to tax their citizens creates an opportunity for people who are mobile, like early retirees.

Picking a Locale for Early Retirement

Early retirees are in a unique position to choose where they want to retire, since they're not tethered to a location by a job or, in many cases, even a mortgage. Here's our criteria for picking a place that will be tax friendly to your situation.

Since early retirees tend to be frugal, picking a city and state that try to get a large portion of their revenue from sales tax is ideal. Early retirees will mostly sidestep this tactic by local governments since they tend to buy less stuff: fewer gizmos, fewer cars, etc. Additionally, it's common for sales tax on basics (like groceries) to be lower or waived altogether, as they are here in Scottsdale.

If you plan on being a homeowner, pick a place with low property taxes. Ideally, look for a place that has a cap on property tax increases as well, if only to plan out future expenses.

If you plan on being a renter, you can mostly avoid the worry of property taxes since there are plenty of places with very low rent (like my native Pittsburgh) that still have relatively high property taxes. Landlords would certainly like to pass on any taxes they pay, but they are constrained by market rents. In my experience, higher property taxes are not correlated with the rent paid, and are not a cost the renter truly ends up bearing.

While working, living in a state with no income tax can be helpful (though it's likely local governments are just getting their tax base via sales and property taxes). But when you're actually retired, don't stress about needing to move to a state like Florida or Texas just to avoid taxes on your income. Early retirees typically look like they earn very little on paper, and should have flexibility in how much they take from a combination of retirement accounts and taxable accounts.

So there it is. It's not a long list, but certain locations are going to jive better with the kind of lifestyle and spending that are unique to you, and can help avoid unnecessary tax costs in early retirement.

What do you say, readers? Are taxes something you're considering when picking a place to retire?

Man I'm jealous! =) We have State AND City income tax, sales tax...and our property taxes are still way higher than that. Pretty cool that they breakdown where your tax dollars go...I like the transparency.

Right? I wish every governmental body did a better job of explaining where the tax revenue went. Citizens really don't understand where their money is going, which can cause a lot of anxiety and feelings like government isn't being efficient. But when I see how far my six bucks go towards the library, I am reminded that government services are often a fantastic deal.

I never would have thought about this... And you know how crazy Allegheny county can be! Maybe my inability to relocate at this point my life put up some blinders. And my lack of real estate portfolio. If I'm ever pulling in bank from income, though, I'm moving to one of those states without an income tax.

I had Allegheny county in mind when I wrote this, remembering what my parents paid (and still pay) in property taxes. For some consumers (i.e. - people who buy quite a lot and want to avoid high sales tax, or just renters) maybe that's a good set up, overall. But as owners who are nearing financial independence, we're thinking about the places we want to live in our early retirement, and taxes (while not a primary driver) certainly will play a part.

Disclaimer: This blog is written for entertainment purposes only: not to give advice. I'm just some dude on the internet, and one without a whole lot of credentials. It's a good idea to consult with professional before making investment, tax, or financial decisions.